Option Trades Update

       May 17 was a down day on the North American markets. Investors and traders are concerned over recent events involving the President of United States Donald Trump.  Adding to this, is the low interest rates that we have currently.  Another major issue is that of Home Capital Group (ticker symbol HCG.TO).  HCG.TO, which is in the mortgage business, continues to be the major topic of discussion. Savers are continuing to withdraw their money from their high interest savings account, which is putting strain on the HCG.TO bottom line.  HCG.TO recently got a 2 billion line of credit from HOOPP, which is Healthcare of Ontario Pension Plan to try to stay a float.  HCG.TO has said in the last week, that replacing the HOOPP line of credit is a top priority due to the high interest rate on the line of credit.

       In Canada, the TSX Composite Index was down 269.65 points which represents 1.73% decrease from the day before. The S&P 500 was down 43.64 points, or 1.82%, for the day.  The Dow Jones Industrial Average was down 372.82. or 1.78%, for the day.

      I currently have to put options set to expire this month. My short put in Royal Bank is set to expire on May 19th.  The stock RY.TO closed at $91.45 today. My strike price is $92.00 and it is for a single contract.

     My other put option is in another Canadian bank, TD Bank.  My short put in TD is set to expire on May 26th.  The stock TD.TO closed today at $62.26, which is below my strike price of $62.50.  I also currently own 100 shares of TD.TO.

     Today's closing prices of these stocks are over $8.00 per share below their 52 week highs. I am not worried at all with option assignment on these stocks, as the banks have proven over the years that they are excellent companies to own.  If Royal Bank option gets assigned I will likely write covered calls as I would like my entry point to be lower. 

Disclosure: Long 100 shares of TD in margin account.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

Option Trade

          The big banks in Canada have falling in value recently. In particular, Royal Bank of Canada (RY.TO) has falling from it's 52 high of $99.90 from a few months ago.  RY.TO is currently trading at  $93.33 per share.

       The major topic in the news in Canada is the company called Home Capital Group (HCG.TO).  The company provides high interest savings accounts for savers at low interest rate and then writes mortgages with a higher interest rate, and basically makes money off the difference.  This business model has been failing as savers have been pulling there money out in droves.  The savers are doing this as they do not feel comfortable having their money there due to recent events happening to HCG.TO.  HCG.TO has recently gotten a $2 billion line of credit from Health Care of Ontario Pension Plan, which they have used approximately 1.4 billion dollars of to stay a float.

       In Canada, there is high cost of housing in Vancouver, Toronto, Edmonton, Calgary and Fort McMurray.  The highest of these costs and in Vancouver and Toronto.  Some people are talking about a possible housing correction, so this has caused the bank stocks to trade lower as of late and slightly offset with investors chasing yield by purchasing shares in the banks.

      So on May 10, I sold a put option in RY with a May 19, 2017 expiration day.  I collected a premium of $41.05 after commissions.

Summary:

Strike Price: $92.00
Total Premium Received : $36.05
Days to Expiration: 9
Current Annual Dividend = $3.48
 Option Assignment Fee = $24.95

Scenario #1 :  Option not assigned

Total Return = $36.05/ (1*100*$92.00)
                     = .00392
                     = 0.392%

The total return for 9 days is 0.392%.  The annualized return is 15.89%.  For comparison, my interest savings accounts pays an annual interest of 0.80%.

Scenario #2:  Option is Assigned 

Adjusted Cost Base  per share= [1*100*$92- $36.05+$24.95] / 100
                                                = $91.89

Yield on Cost = $3.48/$91.89*100 %
                       = 3.787%

 What would the yield be if shares purchased directly at $92.00 using a limit order?

Commission = $4.95

ACB/per share = [1*100*$92.00+$4.95 ] / 100
                         = $92.05

Yield on Cost = ($3.48/ $92.05) * 100%
                       = 3.781%

Conclusion:

      From Scenario #2, we can see the yield on cost would be roughly the same although receiving a net premium of $36.05.  The option assignment fee of $24.95 greatly reduces the difference between the yield on cost of option assignment to that of purchasing shares out right.  Not all brokerages have an option assignment/exercise fee.

     As of this time, I do not plan to open an account with Interactive Brokers. I will open an account with Interactive Brokers in the future.

Disclosure: Currently do not own any shares of RY.TO in any accounts.

DISCLAIMER

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.

One Thing You Can Be Sure Of In LIfe

          We all know people who spend their entire paychecks.  These people live paycheck to paycheck. If you do not know anybody specifically, you can roughly tell by their actions if they live paycheck to paycheck.  Some of these people are in dire straights, while others are just more managers of their money. Some people have plans for their money even before they receive it.  These people might have a lot more fun, but they are also a lot more stressed.  Unfortunately for the rest of us, we here the complaining and snapping at people. 

         The one thing we can be sure of that will happen in an individual's life is an emergency.  These emergencies can be things such as car breaks down, roof leaks, or a job loss.  Emergencies can occur without any notice.  People need to prepare for emergencies before they happen.  People prepare by saving 3 to 6 months of expenses in an account for emergencies.  This is called an emergency fund. 

         The emergency fund  has to be easily accessible.  This can be money kept in a savings account, money market fund,  or somewhere in your house.  By having an emergency fund, an individual will not have use a credit card or sell investments to fund these emergencies.

        Having an emergency fund also allows an individual to sleep better at night.  How much money should be in an emergency fund?  The amount of money put in an emergency fund should be at least 3 to 6 months worth of expenses, but an individual should make there emergency fund as big as they need.

   How would you feel when somethings happens like this:

• car breaks down
• furnace breaks down
• get sick
• lose a job
• sewage backup
• house fire

   For anything that people have insurance for, there is a delay from receiving moving from insurance. For example,  if your house or place of residence catches fire and you have to go to a hotel, you will have immediate access to the money via the emergency fund instead of putting money on a credit card. The insurance will take a few days to go through and you might have to put up a fight to get it.

   People who save money these days will actually lose money due to the interest rates that banks pay on savings accounts and how this compares to inflation.  See, the emergency fund is insurance and not an investment.

    Do you have an emergency fund?

  

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